April 29 (Bloomberg) -- A plan to cap U.S. government
spending that’s gaining support in the Senate could require deep
cuts to Medicare and Medicaid that parallel those proposed in
House Republican Paul Ryan’s budget.

The Senate proposal by Republican Bob Corker of Tennessee
and Democrat Claire McCaskill of Missouri aims to save $7.6
trillion over 10 years by capping federal spending at 20.6
percent of gross domestic product within a decade, down from
24.3 percent now.

Reaching that goal would require “enormous cuts” in
Medicare and Medicaid and other programs, and likely force
similar policy changes to the entitlement programs that Ryan has
proposed, which opponents call extreme, according to an analysis
by the Washington-based Center on Budget and Policy Priorities.

The budget written by Ryan, of Wisconsin, puts spending at
20.25 of GDP in 10 years, about the same as the bipartisan
senators’ plan.

“The Ryan plan is at least quite explicit about the
changes that are proposed to be made in specific programs,”
said Paul Van de Water, a health-care expert at the Center on
Budget and Policy Priorities. The Corker-McCaskill plan “at
first blush may sound sort of benign,” he said. “The effects
on real people in many cases would be extremely dire.”

Robert Reischauer, former director of the nonpartisan
Congressional Budget Office, called the McCaskill-Corker
proposal “a sham.”

Promises Not Kept

Simple solutions such as spending caps sound good, though
“we never are able to pull the trigger on actual measures that
produce spending cuts or increase revenues,” he said. “We have
a long history of making promises that we cannot keep.”

McCaskill was traveling yesterday and unavailable for
comment, said a spokeswoman. The senator has called the cap “a
good place to start the discussion” on spending restraint.
Corker was attending to the damage caused by deadly tornadoes in
his home state and not immediately available, said his
spokeswoman.

Their proposal has backing from Senator Joe Manchin, a West
Virginia Democrat, and Senator Joe Lieberman, a Connecticut
independent, as well as several Republican senators.

Ryan’s budget, approved by the House April 15, would phase
out the Medicare program for the elderly and replace it with
subsidies to buy private insurance for those currently under age
55. It would cap spending on Medicaid, the health-care plan for
the impoverished, and give states more discretion.

Republicans have faced criticism of the Medicare overhaul
in constituent meetings across the country during a two-week
congressional recess.

Distributed Cuts

Under the McCaskill-Corker plan, if Congress fails to keep
spending under the annual cap, the Office of Management and
Budget would make evenly distributed cuts throughout the budget.

If the automatic cuts took place, they would total about
$1.3 trillion in Social Security, $856 billion in Medicare and
$547 billion in Medicaid reductions over the first nine years,
according to the Center on Budget and Policy Priorities report.

To avoid the automatic across-the-board cuts, lawmakers
would probably have to enact policies for Medicare and Medicaid
along the lines of what Ryan has outlined, the report said.

Baby Boom Impact

Federal spending is projected to grow rapidly in coming
years as the Baby Boom generation reaches retirement age, which
means the McCaskill-Corker proposal would require dramatic cuts.
The reductions would total more than $800 billion in 2022 alone,
which would be the equivalent of eliminating the entire Medicare
program or the Defense Department.

By comparison, spending under Republican President Ronald
Reagan from 1981-1989 averaged 22 percent of GDP at a time when
no baby boomers had retired.

Former Federal Reserve Vice Chairman Alan Blinder said it’s
unrealistic to expect federal spending to remain at historic
levels -- McCaskill and Corker say 20.6 percent is the average
over the past 40 years -- when the U.S. population is getting
older.

“It ignores the demographic transition that we’re living
in,” Blinder said of the senators’ plan. “You go back 40
years, we had a lot younger population.”

“Youngsters are cheaper than oldsters -- a prudent family
planning its dotage will understand these things and make
provision for them and not say, ‘that’s just too bad,’” he
said.

Nor should the government do that, Blinder said. “I don’t
think it’s what we really want to do as a society,” he said.

Effect on Recessions

Blinder said the McCaskill-Corker proposal would
destabilize the economy by making recessions worse. That’s
because government spending typically climbs during downturns as
more people apply for unemployment benefits, food stamps,
Medicaid and other types of federal aid.

Those so-called “automatic stabilizers” help support
consumer spending during recessions and “you don’t want to
short-circuit that,” he said.

A spending cap would make economic stimulus packages like
the one approved in 2009 impossible, Blinder said. Lawmakers
could always waive the rules to make room for a stimulus, or if
the government faces unexpected costs from a natural disaster or
war, “but then it sort of makes a mockery of having a cap,” he
said.